Money Flow Puerto Rico & United States?

There is always a big question that many people ask themselves. How much is sent in Federal Funds to Puerto Rico every year?

Answering that question in just a specific dollar amount without understanding completely what all of that would be irresponsible. Even worst when people continue to repeat that federal aid to Puerto Rico is very high without understanding the flow of money.

I have always heard from people up North (U.S.) saying Puerto Rico depends on and benefits heavily from the United States. Serving in the Military and relying on my experiences, I can say I feel like those number above might be representing what I have seen.

Searching for the Source

The infographic above depicts how Money Flows from Puerto Rico to the US and vice-versa. When I created the first draft of this post, I wanted to make sure that we had the source of these numbers thanks to @Lucymfel (biz and life partner) I was able to find this video in Spanish which Rosario Rivera ( @econrivera ) explains where these numbers come from.

The infographic confirms that we depend heavily on the U.S., but the real benefits are for those up north, not the other way around.

If you look closely on the Federal Funds to Puerto Rico you can quickly the reasons and sources of those funds. It would be unfair to call those Federal Funds just Federal Aid.

Video

Translation - Federal Funds to Puerto Rico

The United States → Net Gain - 44.6 Billion

Puerto Rico → Net Loss - 44.6 Billion

From the United States to Puerto Rico (13.53 Billion)

Federal disbursements to Local Government Agencies (2.7 Billion)

Payments sent to individuals such as (1.9 Billion)

Medicaid

Pell

PAN (SNAP in the U.S.)

WIC

Disbursements made earned by individuals (8.9 Billion)

Social Security

Medicare

Veterans

Retirement

From the Puerto Rico to United States (58.1 Billion)

Imports on Registered Merchandise (22.6 Billion)

Capital Gains (34 Billion)

From Large Companies and Manufacturing

Cabotage Law (1.5 Billion)

Fees for transporting imported merchandise on U.S. ships

The Other Side of The History of Federal Funds to Puerto Rico

As I searched for more information, Lucy also pointed out a Google+ post shared by one of the most brilliant individuals I know living on the Island Mr. Marcos Polanco.

Marco's Post on Google +

Intellectuals have a responsibility to educate the public. However, @EconRivera does the exact opposite in the chart she shares, attached, purporting to show how the US capitalist imperialists are taking money from Puerto Rico.

I have no argument with the numbers used on the government transfer from the United States to Puerto Rico, which is the top half. I have not done the numbers myself, so I cannot tell you whether they are right or wrong, but I have no issue with it.

The entire 2nd half is composed of blatant lies.

"Importaciones de Mercancia" refers to $22.6B in purchases that Puerto Ricans make with their income. Commerce is trade...you are exchanging your money for some good, such as computers, software, chickens, rice...whatever. You cannot use that in the same mathematical column as the stuff that is in the 1st half of the chart. A Pell grant check does not trade. The federal government is giving you a check so you can buy stuff, education in this case. Section 8 is not a trade. The federal government is giving you a check so you can buy stuff, housing in that case. And so on. What the chart tries to do is lull you into thinking that the money you use to purchase is being taken from you. This is false.

Let's move on. The "Rendimientos de Capital" mixes two very different numbers: One are "megatiendas", such as Wal-Mart, and the profits they make here. Shouldn't that be in the "Importaciones" category already? It probably is...I can only assume this is a mistake, but a small one. It does not matter. The real stunner is "fabricas", or the manufacturing plants, mostly in this case biopharmaceutical plants. $34B of extracted capital! Wow! Now, where does that money come from. It is the magic of transfer pricing, and I'll try to make this simple:

If you are taxed at 35% in the US mainland and 4% in Puerto Rico, you will try to move all your profits to Puerto Rico, where they will remain largely untaxed. That is exactly what companies do...many times they will assign the patents for biopharmaceutical products to Puerto Rico, and as the patent holder the Puerto Rico corporations have a right to a significant share of profits. Thus a pill that costs only $1 to make by, say, Pfizer in Puerto Rico could easily be sold by Pfizer Puerto Rico to Argentina for $50. Huge profits! Then Pfizer will move that money out of Puerto Rico for productive use worldwide. You see, those $49 did not come from your or my wallets as Puerto Rico residents. They are a result of an international tax strategy, all perfectly legal, that multinationals use to concentrate their profits in low-tax jurisdictions. Yet @EconRivera implies, and later explicitly tells me in a tweet, that this money comes out of our pockets. THIS IS A LIE.

Incidentally, nowhere in this analysis does @EconRivera include the operating costs of the United States Postal Service, or the Coast Guard, or the fact that Puerto Ricans have access to the vast capital pools that create cheap FHA mortgage loans, etc. She also does not include the salaries paid to Puerto Ricans (over 80,000 jobs, down from twice that many a decade back) by multinational manufacturers. The list goes on.

Note that I am not defending Puerto Rico's political relationship with the United States. There is plenty wrong in that relationship and even more broken policies in Puerto Rico's economics, much of which depends on federal policies. What I refuse to condone or allow is perverting the facts and misinforming the public. We have enough ignorance floating around...it is unacceptable for purported intellectuals and professionals to spread more of it. ~Marcos Polanco

My Thoughts

Having an accounting background and working many years as an Auditor, I can only say that numbers and stats can be played with. I am not saying that the information above on Federal Funds to Puerto Rico is wrong or right. My heart wants a simple explanation as to why our Island does not move forward, but I have to approach this by validating the info on Federal Funds to Puerto Rico in many ways logically. The Infographic seems to be a small piece to a puzzle but to confirm each and every point we would need to have more information.

As politicians don't do much to improve the well-being of those that voted for them, I will make sure not give them my vote. I see a lot of uncertainty of the overall well being of the Island, but I have no choice but to focus on my small world to see if I can change the bigger eco-system around me.

I really don’t know. Really. The only thing I am sure is that this is an economical relation. We won’t be a US territory if we are not a source of value for them. For the rest of my thought, I want my little farm with natural resources for water and electrical energy, so I can survive without depending on capital itself.

Maria, US defense strategy has changed since 1898. I know we keep repeating that mantra in Puerto Rico but the world is completely different: witness the opening of the Cuban embassy in the US, the negotiations with Iran that are driving Israel crazy and the Trans Pacific Partnership, which can be seen as a counter-China containment strategy.

Regarding retailers, the US does not need political control for their retailers to thrive all over the world…we are just 3.5 million people, and in any case about $0.60 of every dollar of available purchasing power on the island can be traced back to federal cash transfers.

I agree, the information presented is a piece of a larger puzzle. I don’t understand porque Puerto Rico no progresa and it breaks my heart. I don’t see the US helping PR rather using and exploiting it but only the people of the island can change that. All I see is fear. Puertoricans must learn to embrace change.

It is the people of the island who must get together to create a foundation for change which begins with setting up an educational system geared to preparing children for the future. Puerto Rico must ask itself what kind of future it wants. Why isn’t this happening right now? Yo no se.

I will take a stab at this, and politics are at the heart of the matter.
1. Due to the Foraker Act of 1900, neither citizen nor taxation applied to Puerto Rico. Through the Jones Act of 1917, we got citizenship but still no taxation.2. Teodoro Moscoso brilliantly leverages the lack of taxation to invent manufacturing globalization. That got kicked off through Fomento in 1947. He and Luis Muñoz Marín turn what was really an agrarian society into a modern one through “industrialization by invitation”, an idea by Sir Arthur Lewis, a Nobel-winning economist born in St. Lucia. Yes, it all started here folks.3. Due to this brilliant strategy, money arrives in Puerto Rico like manna from heaven, without our society needing to understand how globalization actually works, or how the drugs we so proudly now manufacture are actually invented.4. The Great Society program by the Lindon B. Johnson administration bring Medicare and Food Stamps to Puerto Rico. More manna from heaven.5. Puerto Rico labor participation rate is now just 39%. People are not working because they are paid not to work: According to the Census Bureau, per capita income in Puerto Rico is $10,762 whereas the U.S. average is $26,059. That means that federal policies to address poverty which affect, say, 5% of stateside Americans may well impact 40% of Puerto Ricans. Read “The Economy of Puerto Rico: Restoring Growth” (http://j.mp/MwsSZD) if you want to become an expert on this: federal policy keeps us poor. According to the research in this book, a single mother of two may face an effective taxation rate of as much as 104% as she tries to generate work income because of the aid she loses. Better to stay home an watch “La Comay”.

6. Politicians learn that Puerto Ricans like manna from heaven! Notice how we evaluate our Resident Commissioner *solely* based on how much federal money they can direct to Puerto Rico; we could not give a rat’s ___ about federal policymaking, which is their job as congressmen. Your average politician can spend four years distributing millions from our rich uncle up north rather than become experts at how businesses are formed and how prosperity is created. We reward this behavior.

7. As the manufacturing strategy starts failing in the 1970s, along with the oil shock that crushed CORCO, the government, probably starting with Rafael Hernandez Colon, figures they should use their credit to fabricate employment through deficit spending. The result? 250,000 people work for the government, about 25% of Puerto Rico’s entire workforce. That’s why we are now broke.

8. Politicans discover they can win elections just serving two constituencies: the vast poor (48% of the population) which they can manipulate through welfare benefits and the 250K votes they can manipulate directly through government employment. Everyone else can be safely ignored.

9. The professional middle class discovers their social irrelevance, as they have no political leverage whatsoever. Manufacturing is no longer a job creator. They discover that a one-way flight to Orlando is just $149. They take the flight. No wonder the researchers for the “Restoring Growth” study found the private sector to be strikingly small given the size of the economy.

10. You discover the truth of the saying, “Idleness is the devil’s workshop.” Since we don’t work, we have plenty of time for drugs, alcoholism, crime, and everything else that is sinking our society…which only accelerates middle-class flight (I hear that 100% of the engineers are now leaving Mayagüez upon graduation).

The real problem is that our only mechanism for collective action, the multi-party politics of democratic government, have been systematically corrupted…even you and me, presumably people of integrity, would keep the cycle going since our #1 goal is to get elected and re-elected.

That’s all just diagnosis. Prognosis? Cure? Smarter minds than mine need to work on that.

Thank you for your very thoughtful and detailed reply Marcos. I do see the big picture and completely understand how the island arrived at its current state. I just cannot comprehend why great minds are not working together to break the cycle and bring about change. How much more suffering must happen on the island? What will be the breaking point?

If all of the islands talent is leaving, change might have to take place from the US. Not the government. I’m referring to Puertoricans living and thriving in the US rather than the island.

The biggest problem with those on the outside is that they take affiliation with political parties. Many things are being done to change things the problem is that those on the outside need to do the effort to stay connected. A good example of people doing great things to change stuff is Marcos.

Marcos does a lot for Startups along many others who work to change Puerto Rico.

Those on the outside need to disconnect from listening to Major press and tv outlets come to the island spend a good amount of time to understand what is being done! The same way my jewish friends continue to go back to Israel to support their people those on the outside need to return in one way or the other for a bigger period of time so they can help with the solutions!

Maritza Hernández

I am one of those that had to leave the island and the colonial mentality follows. There are many posts here about how everything is bad in Puerto Rico and everything great in the US. Many people have blinkers and can not see the reality nor of Puerto Rico nor of the United States, and to change things you have to be able to see. I don’t agree with the fact that most talented people are leaving the island. I just came back from my High School reunion with a whole bunch of extremely smart and talented people that have stayed in the island.

@maritzahernndez:disqus It is not our opinion there are enough stats displaying many talented individuals have left the island. There are many talented individuals still left. I am not sure where you get the idea of me writing about how things are better in the U.S. I donate my time and try to make Puerto Rico better. More importantly I try to seek change by pissing off people because there is a lot more left to do. My question to you is other than sharing your opinion what efforts are you involved in to help the Island.

By the way @maritzahernndez:disqus you are a Yale Graduate and are living in the U.S. (or are you living locally on the Island)?

Jose Cruz

I must say that I was, for a lack of a better word, inspired. I’ve been making this argument for a long time with little to no success. But you have articulated it beautifully. I could not possibly agree with you more. Thank you for helping me understand how to better communicate my argument.

The numbers for the flow into Puerto Rico are generally believable as they accord with numbers calculated by other economists. The numbers for the outflows are the issue, and the two big ones can be found in the Puerto Rico In Figures 2007 document published by the Government Development Bank (http://www.bgfpr.com/publications-reports/puerto-rico-figures.html), which itself is based on numbers from the Junta de Planificación. I specifically invite you to look on page 21, where you will find that the top $22.6 billion us poor Puerto Ricans buy from our master is actually tons and tons of chemicals…it sounds very much like the industrial inputs into the biopharmaceutical industry are bundled right in there. The data selection in this graph is pure manipulation. I will also note that the capital exports which I refer to in my writeup, do not go into the United States…that would invalidate the tax advantage of manufacturing in Puerto Rico. The large majority does go to U.S. corporations, but the flow of capital goes to finance their foreign operations because of quirks in the U.S. tax code.

If you ask me, “¿Podemos vivir sin ellos?” the answer is clearly yes, since there are 192 sovereign countries in the world and the vast majority are not Somalia. But let’s stop the blatant lies by so-called professional economists.﻿

This entry is an eye opener. I have gained so much insight and seen any thing I’v overlooked before. I tip my hat to Mr Polanco who in the comments section has carefully given us a clear explanation of how our economy has come to what we see today.

My theory is that the relationship between the US and us will end when the US can’t squeeze any more juice out of us. Then they will tell us to decide between statehood or independence and will make independence the most glittering option to lead the people to “choose” it. But then we will not have agricultural lands to feed us bt will have a good industrial infrastructure. That may help us.

Goodd way to stirr up a good conversation Raul. This post really tickled my brain.

We don’t mind exchanging money if there is a mutual benefit. Our issue is how the U.S. controls the economy to their benefit so individuals like you can have the freedom to comment from the west coast of the U.S. without understanding clearly what is going on in the Island.

I would have thank you for sharing your thoughts but your tone lacked respect. You are always welcomed to bitch here on my blog if you need to vent.

CB1138

I think Latin Americans and Americans might be the terminology, or at least it is a beginning of thinking it through. [http://latinosusa.today/298/hispanic-or-latino-what-is-the-difference/1/] If Puerto Rico is a colony, that is an utter disgrace because it is a betrayal of the rationale for 1776.

shalie

There is a problem with this calculation in 2002 PR received $17 billion and those numbers have gotten higher and higher. The outflows are shady when you re buying a good you are making a transaction so you received a good in exchange for money that is called a transaction that is not an outflow Accounting 101.